Thursday, December 21, 2006

We all know that the most annoying spammers on the planet today are the ones who are sending out the image based Stock spam that seems to be most gifted at by-passing every form of spam filter. I frequently get the question: "How do these guys make money?"

This week, the Securities and Exchange Commission website has two interesting cases that give us some details. They illustrate two different methods of pump & dump. Account Theft, and False Profile spamming.

The subject of this action, Grand Logistic, is a company owned by Evgeny Gashichev who resides in St. Petersburg, Russia. His company operates in Estonia and is licensed as a corporation in Belize. The company exists to speculate in the penny stock market. The way it works is that Evgeny placed $30,000 in an online brokerage account, and began buying penny stocks. Curiously, these stocks, which had seen almost no activity, began to be bought and sold like mad after Evgeny would purchase them.

The charges from the SEC indicate that Evgeny would buy penny stocks from HIS account, and then would log in using stolen credentials to many other accounts, including E*Trade, ScottTrade, and TD Ameritrade accounts and make large purchases from other people's brokerage accounts - without their knowledge or permission - in volumes ranging from 6,000 to 71,000 shares! Then, when the price had risen sufficiently, Evgeny would liquidate the holdings in that account from his own profile.

So how did he do? Evgeny's initial investment grew from $30,000 to $383,000 in just seven weeks!

Now let's turn our attention to the Stock Spammer case "Red Hot Stocks". This is a case where we get to see the "end of the story", however, as usual, the question remains outstanding whether or not justice has been served. Still, the SEC is to be applauded for their action.

In the current SEC Final Judgement against Red Hot Stocks defendant Dieter Raabe, Raabe was ordered to pay $489,900 in disgorgement, plus prejudgment interest of $215,110 and post judgment interest of $16,300, and a civil penalty of $110,000, for a total of $831,310.

Wow! $831,310 sounds like a great deal of money! But wait, didn't we establish that in 2002 he had already earned $4 million from his fraudulent trading schemes!?!?

This case goes all the way back to an SEC Complaint in 2002 against Red Hot Stocks, where the SEC filing indicates that the defendant had earned more than $4 million through manipulation of the stock market.

In this situation, subscribers of the "Red Hot Stocks" website received a newsletter which contained a false or misleading statement about the dealings of a penny stock company. One of the biggest problems though, from SEC rulings, is that the profiles were made without disclosing that the author and promoter was personally planning to liquidate a large holding once his objectives had been met. There are rules dictating when an "insider" may sell their stock holdings after public statements are made. Raabe was previously accused with James E. Franklin. Franklin operated the companies "Vector Keel Ltd." and "Initial Public Offering Consultants, Inc." who would buy (or receive for services rendered) the stock. Then "Red Hot Stocks" would create online profiles for the companies, and spam the hell out of the profiles waiting for payday.

The actual Red Hot Stocks website is still available thanks to the Archive.org WayBack Machine. Here's a link:

So, this case brings to a close Pump & Dump activity which occurred through this "free stock tips" newsletter offered more than 8 years ago!

Many examples of similar scams can be found in the archives of Harvard University's CyberLaw archive on Stock Spam. Here is a great resource listing stock symbols touted by spam, produced by Laura Frieder and Jonathan Zittrain: